Ground Rent Seeking in U.S. Economic History

Prof. Fred E. Foldvary

School of Management, John F. Kennedy University and
Department of Economics, California State University at Hayward

for the session on

Market Failure, Government Failure, and Public Choice: Lessons from U.S. Economic History

Friday, Nov. 21, 1997

Southern Economic Association Meetings

Atlanta, Georgia

Abstract

The term "rent" originally meant the return on land in
classical economics, and later also came to mean economic rent,
returns not needed to put factors into production. Much rent
seeking has been the transfer of land and land rent via the
political process, rents in both senses of the term. This paper
argues that rent or transfer seeking is induced by the structure of
government, which has remained fundamentally unchanged since the
adoption of the U.S. Constitution. Public choice theory indicates
that rent seeking would take place during the 19th century, an era
often pictured as an era of small government and budgets in
balanced or in surplus. Much rent seeking did indeed take place,
and the vehicle of transfers in the 1800s was land. With income
regarded as an increase of assets, the federal budgets during the
1800s had massive off-budget deficits due to the large amounts of
lands transferred, reducing the government's asset endowment. The
paper also notes that much of the transfers went to concentrated
interests, accompanied by substantial fraud and corruption. The
paper concludes with an alternative voting structure that would
likely reduce the rent-seeking disease of democracy.

Rent seeking is a function of government structure. As
Charles Rowley (1993, p. 1) puts it, "majoritarian democracy
generates a mercantilist economy." A central principle of public-choice theory is that transfer seeking, the "disease of democracy,"
is a consequence of concentrated benefits and spread-out costs,
like an iceberg, in which the benefits above the water are borne by
the greater mass beneath the surface. This iceberg effect is
caused by the incentives of the political structure, as laid out by
Mancur Olson (1971). Olson noted that the incentives change with
group size, small groups being less conducive to transfer seeking.1
Rent or transfer seeking is thus an outcome of mass democracy, the
existence of large pools of voters electing representatives who
depend on expensive media campaigns. The alternative of basing
elections on a structure of small groups would induce fewer
transfers (Foldvary, 1996), as described in the conclusion.

Although much has changed in American politics since the
adoption of the U.S. Constitution, the basic structure of mass
democracy has not changed. The main change is the direct election
of Senators by the voters in the States rather than by the State
legislatures, a change that shifted the recipients of transfers but
did not alter the incentives of Senators to engage in the market
for legislation. Moreover, as illustrated by the history the
political machines of 19th-century American cities, the corruption
induced by mass democracy is no recent phenomenon. Henry George,
writing in 1871, wrote of "the ease with which a few great rings
wrest the whole power of the nation in their aggrandizement"
(George, 1871, p. 46).

The inducement to federal rent seeking was present since the
adoption of the Constitution. However, the 1800s are regarded as
an era of small government, with budgets balanced or in surpluses.
"For our first 60 years as a Nation (through 1849), cumulative
budget surpluses and deficits yielded a net surplus of $70 million"
(Office of Management and Budget, 1997, p. 15). "Prior to the end
of the Second World War there was no 'deficit problem'" (Anderson,
1986, p. 9).

Large federal budget deficits are regarded to be a recent
phenomenon. Buchanan, Rowley, and Tollison (1986, pp. 4-5) note
that there was a "serious breakdown in the post-1960 nexus between
constitutional and legislative decision-making. The broad
constitutional consensus in favor of prudent household economics
crumbles into insignificance when confronted with the pluralistic,
interest group dominated political brokering of legislative
politics." The growth of the federal government since 1960 and of
the federal deficit since 1970 has indeed been congruent with an
expansion of transfers.

However, transfers were significant, even massive, in the 19th
century as well, but with a different vehicle of transfer than in
the 20th century. The vehicle of the 1800s was not funds obtained
by taxation, but an endowment held by the government: land. The
land, including natural resources, constituted an enormous stock of
assets available for transfer to those with sufficient clout to
obtain them. At first, land was sold and generated revenue, but
soon, as explained by Anderson and Martin (1987), the land policy
became an immense rent-seeking transfer program. Throughout the
19th-century, the federal government gave out land rents as
political favors, a practice which continues to the present day.
This has been rent-seeking with a double meaning, the political
rents being constituted as ground rents. The proposition that the
practice is endemic in the structure of government is consistent
also with policy going back to ancient times. As noted by Henry
George (1871, p. 47), the Senate of ancient Rome had "granted away
the public domain in large tracts, just as our Senate is doing
now."

These land transfers were not a historical accident, but
played a key role in the founding of the government of the United
States. Charles Beard (1913) identified three key interest groups
that supported the Constitutional Convention: money lenders,
protection-seeking manufacturers, and land speculators. A key
advantage of the Constitution to the land seekers was that it would
empower the central government to take the Indian lands with its
national army (Friedenberg, 1992, p. 325). Land located where the
Indians were a threat appreciated in value with the prospect of
protection by the new government (McDonald, 1958, p. 395). In
several Southern states, the western land issue was the key factor
in ratifying the Constitution, as the tariff was to northern
states. (Ironically, western expansion would later be a cause for
secession.) Friedenberg (1992, p. 327) concludes that "without the
support of key political figures deeply involved in land
speculation, the Constitution would not have been adopted."

As Anderson (1986, p. 18) notes, while officially the federal
budgets from 1866 to 1893 had surpluses, "the ordinary figures for
federal government expenditures over the period 1866-1900 fail to
incorporate the cost of one major federal spending programme - the
system of land grants of the public domain." These value of these
transfers cancel out the surpluses, and instead created an economic
off-budget deficit (Anderson and Martin, 1987, p. 916).

Lant-rent granting and transfers have taken several forms: 1)
grants of land; 2) public works which increase the value of land;
3) water licenses; 4) leases and royalties for mineral and forest
sites at below-market rates; 5) the rental value of the electro-magnetic spectrum; 6) other natural opportunities exploited by
technology, such as airline routes, satellite orbits, and the
genetic stock of life on earth. The focus here is mainly on the
19th-century grants of land.

As noted by Henry George (1871, p. 5), there is a check on
transfers of revenues raised by taxation, since the general loss is
felt by the taxpayers, even though they may be rationally ignorant
as to the recipients and their efforts to obtain the transfers.
This check does not exist with transfers of natural resources, and
huge transfers can be and have been made with little public
opposition. The land federal land program was called the "giveaway
system" and the "great American barbecue" for its widespread
corruption and misuse of the Homestead Act, the Timber and Stone
Act and the Forestland Script Legislation (Gates, 1984, p. 43).

Land transfers of the 1800s

The stock of land held by the United States government during
the 1800s (which grew with the acquisitions of the Louisiana
territory, the northwest, Texas, the southwest after the Mexican
war, and Alaska and Hawaii) was so large it was thought to be
inexhaustible. As late as 1870, the General Land Office reported
U.S. government or "public domain" holdings as 1,387,732,209 acres,
including Alaska (George, 1871, p. 1). This land provided the
government with an asset which could be transferred to special
interests such as the railroads. The stock of natural-resource
land has also expanded with the development of technology such as
radio and television, since the electro-magnetic spectrum is also
economic land divisible into usable frequency lots.

The transfer of lands is a reduction of government assets, but
it does not show up as a deficit in national income accounting.
When the government sells some land at the market price, the funds
are counted as income. In terms of proper accounting, the
government has exchanged a real asset for a financial asset. It is
not really Haig-Simons income, since there is no change in total
asset value. But national accounts record the sale as income, and
when the income is used for public consumption, then the total
assets held by the government are reduced, and this should be
properly recorded as a deficit. When assets are given away, the
result is a also a deficit, an expenditure not matched by income,
a reduction in asset value being a deficit just as an increase in
asset value is income. Hence, the gratis transfers of the electro-magnetic spectrum also constitute actual budget deficits, and the
19th-century transfers of "public" or government-domain land to
private parties constituted massive government budget deficits.

During the 19th century, the U.S. government disposed of 871
million acres (Anderson and Martin, 1987, p. 905). Some of the
original 13 states held western lands which were also transferred.
Virginia handed over much of Kentucky to insiders by 1783, which
led settlers to secession. "Five years after the Kentucky country
was opened, the lands had been so engrossed by absentee speculators
that the settlers pleaded for Virginia to take corrective action"
(Friedenberg, 1992, p. 214). According to Friedenberg (p. 220),
this Kentucky episode was of national significance: "the entire
political structure of the United States, from the lower levels of
state legislatures and governors to the U.S. legislature and then
the Supreme Court and presidency, was fueled for many decades
thereafter by money made in this land speculation." The large land
holdings in Kentucky and other new southern states entrenched the
institution of slavery. Had these lands been settled and owned by
small farmers, the history of the south would have been
substantially different.

In Georgia, the Yazoo companies (named after the Yazoo River
in Mississippi) obtained grants of over 25 million acres in 1789,
comprising most of Alabama and Mississippi, for $200,000. "It is
evident that the groups securing these grants had been hastily
formed and had no well-developed plans for exploiting the
territory" (Livermore, 1939, p. 148).

Federal land sales were dominant after 1818. In 1836, sales
constituted 48 percent of federal income (Gates, 1984, p. 37).
During the 1860s alone, some 200 million acres were transferred to
the railroads (George, 1871, p. 3).

In the early years of the U.S., it was the intention of many
Congressmen to allocate land to actual settlers for actual use. In
discussions of the government domain in 1796, Congressmen voiced
support for the encouragement of freeholders and for dividing the
land into small lots. The common view was that this would
encourage the economic independence and prosperity of the citizens
(Wellington, 1914, pp. 1-2). However, up to 1870, only about 100
million acres had been transferred to farmers (George, 1871, p. 4),
hence most of the land went to those not using it for immediate
productive use and much of it to large holdings.

From 1850 to 1900, the average annual expenditures of the U.S.
federal government amounted to $300 million (Office of Management
and Budget, 1997, p. 1). The 871 million acres disposed of in the
1800s, if priced at $2 per acre would, at five percent interest,
yield $87 million per year in rent. Only a small amount of the
lands granted were "junk land" (Anderson and Martin, 1987, p. 911).
Thus, as a rough estimate of the order of magnitude, the land
transfers were tantamount to an annual deficit of about 30 percent
of the latter 19th century annual federal budgets. With the
average price of railroad land about $4.75 per acre in 1880
(Anderson and Martin, 1987, p. 908) and an overall average per acre
estimated at $7.50 (p. 917), the deficit was most likely
substantially higher. Taxation could thus have been significantly
lower if the government had been collecting rent on that land or
earning interest on the proceeds of land sold at market prices.
The rental value of all U.S. land would have been more than the
tariff and other consumption taxes. As argued by Anderson and
Martin (1987), land sales were a substitute for the tariff, and so
the political pressure from the North was to give the land away so
that there would need to be a protective tariff which also provided
revenue. This pressure became especially effective after the South
seceded, as the various transfer acts of 1862 were passed.

The bulk of the transfers were gratis or at very low prices.
According to George (1871, p. 4), "the receipts from sales has been
not much more than sufficient to pay the cost of acquisition or
extinguishment of Indian title, and the expenses of surveying and
of the land office." Until 1820, sales were made at $2 per acre,
when the price was reduced to $1.25.

Western interests opposed using the land sales for revenue,
preferring to keep land cheap. President Andrew Jackson in 1832
favored disposing of the lands at a low price to speed up
settlement. Since the national debt was almost paid off, he
advocated that the land transfers "shall cease as soon as
practicable to be a source of revenue" (Wellington, 1914, p. 42).

As Peter Barnes (1971, part 1) put it, "the typical
speculator's gambit was to form a "company" which would bid for
massive grants from Congress or the state legislatures, generally
on the pretext of promoting colonization. Once a grant was obtained
- and it never hurt to be generous with bribes - the land would be
divided and resold to settlers, or, more likely, to other
speculators. The enormous Yazoo land frauds-in which 30 million
acres, consisting of nearly the entirety of the present states of
Alabama and Mississippi, were sold by the Georgia legislature for
less than two cents an acre, and then resold in the form of scrip
to thousands of gullible investors - was perhaps the most famous of
these profit-making schemes. Huge fortunes were made in such
swindles, often by some of the most respected names in government."

The land transfers to speculators for resale did not merely
enrich a few at the expense of many, but affected the subsequent
settlement of the country. The speculative demand increased land
prices and thus hindered settlement by those who lacked the means
to purchase land. As noted by Hibbard (1924, p. 219), speculative
purchases "held land out of the market for at least a time and so
compelled settlement to pass around or across it." Agriculture was
often held back, since speculation was regarded as more profitable
until the bulk of the land was claimed. Government policy
facilitated it because many officials were involved. "It was an
open secret that many members of Congress were deeply involved in
land speculation" (Hibbard, 1924, p. 219).

Many of the grants and purchases were not subdivided, and thus
led to a pattern of concentrated land holding which has, if
anything, intensified. The Gini coefficient among farms has risen
from .57 in 1910 to .76 in 1987, and the measure is .92 if one
adjusts for the loss of farms (Gaffney, 1993, p. 120).

In 1835, with the national debt paid off, the federal
government began generating a surplus based on land sales tied to
expanding bank credits protected by securities provided by land
speculators in return for bank paper which was used to buy ever
more public land at $1.25 per acre. The government surplus was
thus a paper surplus (Wellington, 1914, p. 49), the land sales now
tied to the issue of excessive bank credit.

Much of the land speculation in the U.S. has been related to
government public works projects, which greatly increase the value
of the land serviced. In the 1830s, the stimulus was canal
building. The success of the Erie Canal in New York State and the
rapid rise of land values along its route led to the extension of
the same speculative calculations to Chicago when a canal linking
Lake Michigan (and New York via the Erie Canal) to the Mississippi
River was proposed. In 1833, the federal government appropriated
$25,000 to dredge the harbor. The local Black Hawk Indians were
subdued by federal and local troops in 1832, sparking a rush of
settlers to Chicago (Hoyt, 1933, p. 19).

The speculative mania was fed by a "superabundance of paper
money issued under diverse state laws" (Hoyt, 1933, p. 28).
Government lands could be purchased with irredeemable "rag money"
created by the state-controlled "wildcat" banks (Sakolski, 1932, p.
234). The newly chartered State Bank of Illinois was empowered to
loan funds for real estate. A branch of the bank was established
in Chicago in December 1835. "One of the most potent devices for
raising land values, liberal credit to land buyers, was thereby
created" (Hoyt, 1933, p. 27). Various government interventions
were thus tied to the land-rent seeking: transfers of land, public
works, and state control of the banking system.

Jackson issued the specie circular of July 11, 1836, requiring
payment for land in gold and silver (Wellington, 1914, p. 51).
Speculation ceased, but the damage had been done. Land prices had
nowhere to go but down. In May 1837, the banks of New York
suspended specie payments and there was a tightening of the money
market. On May 29, 1837, the Illinois banks suspended specie
payments, backed by a special act of the legislature. It became
impossible to borrow money on real estate or to renew existing
loans. The panic of 1837 became a national depression. Real
estate prices collapsed. Debtors defaulted. Chicago land
purchased for $11,000 an acre in 1836 sold for less than $100 in
1840. Land that had been staked out and held during the
speculation of the 1830s was converted into cultivation during the
1840s when no further immediate gains were anticipated (Hoyt, 1933,
p. 40). Land policy was thus the root cause of the depression.

President Van Buren favored a policy of pricing land sales
according to value, and for actual improvement (Wellington, 1914,
p. 70). In 1841, after temporary bills in 1838 and 1840, the right
of pre-emption was granted to settlers on surveyed land, which
extended to unsurveyed land in 1862. This law allowed families to
settle on 160 acres of unsurveyed public land, with first right to
purchase when the land was ultimately placed on sale.

The next real estate cycle was underway as the long-awaited
Chicago canal opened in 1848. The Illinois Central Railroad
secured a land grant of 2.5 million acres from Congress in 1850.
The city constructed plank roads, sidewalks, gas lights, sewers,
and bridges. "Plank roads contributed greatly to the rise of land
values" (Hoyt, 1933, p. 64). The ease of borrowing money from the
new state banks again encouraged real estate speculation. There
was also a rapid rise in land values in San Francisco; "speculation
carried it beyond prudent heights" (Sakolski, 1932, p. 258). In
the summer of 1857, a financial panic began, starting in New York.
(Land values had collapsed earlier in California.) Overspeculation
in western lands and too-rapid railroad building were blamed.
Banks suspended specie payments. A depression followed in 1858.
Most holders of real estate hung firmly to the peak prices of 1856,
but by 1859, land values had dropped sharply to half or more than
the previous levels.

The South had blocked free grants to settlers, fearing an
increase in the population of the non-slave lands. After the Civil
War began, the Homestead Act of 1862 was passed, granted citizens
the right to own up to 160 acres at $1.25 or $2.50, depending on
its quality, on the condition of cultivating it. Homestead grants
amounted to 214 million acres (Anderson and Martin, 1987, p. 908),
but most lands were granted to corporations and non-cultivating
individuals for a few cents per acre (George, 1871, p. 5).
"Cattlemen and speculators, both large and small, made widespread
use of the 'dummy entryman' trick and other ruses to acquire
holdings far in excess of 160 acres, and the Land Office lacked
either the will or the ability to stop them" (Barnes, 1971, part
5).

Homesteaders as actual settlers were supposed to have priority
before public sales of land, but in practice, there were public
sales before lands were settled. Speculators were thus able to
obtain choice lands at low prices, often circumventing the law.
"By means of cabins built on wheels or at the intersection of
quarter section lines, and false affidavits, a good deal of land
grabbing has also been done under the pre-emption and homestead
laws" (George, 1871, p. 5).

After the Civil War, "Chicago shared the zeal for public
improvements with many American cities". These included sewers,
street paving, lamp posts, and bridges. "Lavish expenditures for
improvements, and some political corruption, were blended in the
land boom that culminated in 1873" (Hoyt, 1933, p. 88). Post
Civil-War land values gained impetus near parks and boulevards.
One contemporary writer noted that "the city acceded to the demand
of every real estate speculator who asked for improvements" (p.
117). The value of real estate was often raised on the strength of
projected improvements. By 1873, business profits were receding.
Wages declined. Land values halted their advance. The stock
market crashed, and commercial failures brought on the Panic of
1873.

As Wellington (1914, p. 115) concludes with respect to the
land policy, a "really scientific law could not have been enacted,
for it would have been opposed by those sections which regarded it
as harmful to their interests."

Recipients of Land Grants

Most grants of land by the federal government to individuals
went to war veterans, amounting to 78 million acres. Land payments
to veterans began with the Revolutionary War, with soldiers paid in
script for claims on western land. The land debt in turn created
pressure to kill and remove the Indians, which required a strong
national government (Friedenberg, 1992, p. 356). The plantation
and patroon lords used State-backed paper money to buy up the
confiscated Loyalist lands (p. 357).

Congress rewarded veterans of the War of 1812 and the Mexican
War with land in Ohio, Michigan, Illinois, Maryland, and Arkansas
(Gates, 1984, p. 38). These grants could be considered as part of
the payments for military services rendered, hence not rent
transfers. However, the transfers were in the form of warrants for
land, almost all of which were sold to land speculators rather than
exercised for land. The yield to the warrant sellers has been
estimated at 25 cents per acre. The opportunity cost of these land
grants was the funds that could have been raised by sales,
amounting to $91 million at $1.25 per acre, while even at 50c per
acre the soldiers obtained only a total of $36 million. Settlers
paid about $2 per acre to the speculators who bought the warrants
(George, 1871, p. 6). Thus, even payments in kind for military
services led to a substantial transfer of unearned rents compared
to the maximum the government could have obtained for the lands.

The federal government also transferred large amounts of lands
to the States for public works, government buildings, schools and
colleges, and reclamation. Though the explicit recipients were the
State governments, this rent seeking originated with the
manufacturing interests of the North Atlantic States. Homesteading
would induce emigration to the west, raising wages in the east and
also decreasing northeastern land values. As noted above, these
interests also opposed large land sale proceeds for federal
revenue, which would reduce the effectiveness of political pressure
for a protective tariff that also raised revenue. They advocated
that sales proceeds be distributed among the States by population
(Wellington, 1914, p. 5).

The Agricultural College grant was enacted in 1862. The
States were given 30,000 acres for each Senator and Representative.
States such as New York lacking in federal lands were able to take
land in other States. New York State was thus able to obtain rent
from land it owned in other States. Since the land of the southern
States was reserved for homesteading by an Act of 1866, they too,
along with Texas (whose public land belongs to the State), obtained
lands in other states. Thus, for example, Californians ended up
paying rent to or buying land from colleges in many other States,
a redistribution in favor of States which obtained land grants
located in other states (George, 1871, pp. 6-7).

The most notorious example of land grants were the railroads.
A precedent was set by grants of four million acres for roads and
4.5 million for canals. The grants to railroads began in 1850,
with 2.5 million to Illinois Central. The Pacific Railroad bill of
1862 gave the Union, Central, and Kansas rail companies ten
sections (one square mile, or 640 acres) of land per mile plus
bonds, doubled in 1864 to 20 sections, or 12,800 acres per mile of
railroad (George, 1871, p. 7). Land grants to the Northern and
Southern Pacific railroads did not include bonds, but doubled the
land area in the Territories to 40 sections, 25,600 acres per mile.
The largest grant, to the Northern Pacific, totalled 58 million
acres. The railroad in addition obtained rights of way and land
for stations and other facilities. The railroad companies also
obtained the privilege of cutting timber on government land (p. 8).
These assets were far in excess of the cost of building the
railroads by private firms that in a pure market would be financed
by the investors.

The lands obtained appreciated in value, adding to the gain by
the railroads. At $20 per acre, the land grants amount to half a
million dollars per mile of railroad, or over $1.1 billion to the
Northern Pacific for a railroad costing it $80 million. The
company's own publication stated that it would have a surplus even
at $2 per acre (George, 1871, p. 9).

An argument for grants of land to the railroads was that the
rail lines brought in settlers, making the land more accessible and
thus adding to the land value. But as George (1871, p. 10) noted,
the subsidy only bought time, inducing the railroads to be build
sooner than they would have been. The railroads would have been
built without subsidies later on, when business would warrant the
construction. Moreover, the early building of the rails was at a
cost to those who settled after the grants, since they had less
land available for homesteading, having to buy land or pay rent to
the railroads. The increased price of land then may have retarded
some settlement, the greater access to land being offset to some
extent by its greater price.

Another argument was made that the lands were unoccupied
(except by Indians) and were free, so there was no cost to the
public. But this ignores the opportunity cost. The foregone
public revenues were transfers from the government domain to the
concentrated interests obtaining the grants. Secondly, investments
made because of a subsidy draw funds from other investments which
could have been made, which customers at the time are willing to
pay for. The opportunity costs were recognized by Henry George
(1871, p. 11), long before the concept became familiar to
economists: "for the investment in capital in one enterprise
prevents its investment in another."

Land transfers in California

Land transfers in California followed a pattern similar to
that of the United States: massive transfers to concentrated
recipients. Even with a population of only some 600,000 in 1870,
the same voting structure, mass democracy, induced the same type of
land rent seeking, indicating that just having a smaller scale
(lower population) does not reduce the extent of rent seeking.

A lasting effect of the 19th-century land transfers is the
continuing high concentration of landownership in California. A
1970 study by the University of California Agricultural Extension
Service found that 3.7 million acres of California farmland are
owned by 45 corporate farms. This constitutes nearly half of the
agricultural land in the state and about three-quarters of the
prime irrigated land (Barnes, 1971, part 3).

California's land transfers had a special feature, the Mexican
land grants (which existed also in other Mexican territories such
as New Mexico), in turn inherited from Spanish grants. By the
terms of the cession of California to the United States, these land
rights were retained. Some of the original Spanish grants have
been retained as giant holdings today, including the Irvine Ranch
(88,000 acres in Orange County), the Tejon Ranch (268,000 acres in
the hills and valleys northeast of Los Angeles, 40 percent owned by
the Chandler family (which publishes the Los Angeles Times), Rancho
California (97,000 acres to the northeast of San Diego, jointly
owned by Kaiser and Aetna Life), and the Newhall Ranch (43,000
acres north of Los Angeles) (Barnes, 1971, part 3).

The borders of these grants were often not well determined,
and this left many titles uncertain and unsettled, hence subject to
litigation. Being unfamiliar with American law, native Mexican
grant holders were taken advantage of by land speculators and their
lawyers. Most of the grants passed on to other owners (George,
1871, p. 14). This constituted a subtle form of land takings, the
law permitted or did not prevent a massive transfer of titles by
means of fraud, such as with forged title papers. According to
George (p. 15), "there are pieces of land in California for which
four or five different titles have been purchased."

Besides the fraudulent land transfers based on historic
grants, there were bogus grants, sometimes bearing the signatures
of former Mexican officials. The holders of the bogus grants then
drove off the settlers, backed by the sheriff and even U.S. troops.
Holders of bogus grants enjoyed legal possession until the final
legal settlement of a case, and in some cases were able to extort
payments from settlers (George, 1871, p. 16). There were attempts
to remedy the situation with legislation in the U.S. Congress, but
"somehow or other it has always turned out for the benefit of the
land grabbers" (p. 17).

Many settlers who thought they had settled on government land
wound up losing their lands and improvements to the holders of
grants whose borders "floated" according to the value of the
neighboring properties. "The grants have been extended here,
contracted there, made to assume all sorts of fantastic shapes, for
the purpose of covering the improvements of settlers and taking in
the best land. There is one of them that on the map looks for all
the world like a tarantula" (George, 1871, p. 15).

Much of the best valley land in California was granted to the
railroads. Although they received alternate sections, in practice
the lands were not marked, and homestead settlers could not
determine what land was government and what was railroad land.
Where land was surveyed and marked, the "vaqueros" or cowboys
working for the railroads pulled up the stakes (George, 1871, p.
18). Thus, lands granted to the railroads for the purpose of
enhancing settlement instead hampered it. Whereas it was argued
that the companies would sell their lands to settlers, in actuality
they were "in no hurry to sell their lands, preferring to wait for
the greater promise of the future (p. 18).

If not the Mexican land grants or railroad lands, the land
under federal domain in California could have been transferred to
individual settlers. But much of that land went to a few
speculators, often through fraud. Lands not sold were marked on
maps as taken (George, 1871, p. 18). Settlers at a land office
would be put off while the land they wanted was acquired by a
speculator, and the settler would then be referred to him for
purchase. Much land was also bought at 50c per acre from
Agricultural Colleges of the eastern states and then resold for $4
to $20 per acre. Some land in California was bought with script
issued to Indians for their lands. Purchasers who claimed to be
attorneys for Indians obtained some of the script and were able to
obtain land with it (p. 19).

The federal government granted to the State of California some
7.4 million acres of land, plus 3.4 million acres of swampland
(wetlands) via the Swamp Lands Act of 1850. The government of
California disposed of the land to rent seekers in a manner similar
to the federal government, consistent with the hypothesis that the
structure of government and voting engenders such rent seeking.

Contrary to the laws of the United States and the Act
admitting California into the Union, the State sold unsurveyed land
until stopped by the courts in 1863. Restrictions on warrants for
State lands were ignored. Settlers who had relied on federal law
had their lands taken away by those with the land warrants. In
1868, the legal restrictions on the amounts and use of lands sold
by the State were eliminated. Buyers were no longer required to
settle the lands bought (George, 1871, p. 20).

Buyers had an incentive to declare a site as swamp land, which
was sold for $1 per acre, with the proceeds applied to reclamation.
The state sold to anyone who could present an affidavit. George
estimates that about half the land sold (or given away, with the
funds returned for "reclamation") as swampland was dry land.
George noted that buyers had "powerful friends in Washington"
(1871, p. 22).

Henry Miller's acquisitions illustrate the methods used. The
Swamp Lands Act provided lands to individuals free of charge if
they would agree to drain them. "The law provided that the land
had to be underwater and traversable only by boat. Miller loaded
a rowboat onto the back end of a wagon and had a team of horses
pull him and his dinghy across his desired grassland. Eventually
the government received a map of the territory from Miller,
together with a sworn statement that he had crossed in a boat.
Thousands of acres thus became his" (Barnes, 1971, part 3).

In 1877 under the impetus of California's Senator Sargent, who
acted on behalf of Haggin and Tevis, San Francisco tycoons,
Congress approved the Desert Land Act, the bill signed by President
Grant in the last days of his administration. The law removed
several hundred thousand acres from settlement under the Homestead
Act. These lands, alleged to be worthless desert, were to be sold
in 640-acre sections to any individual who promised to provide
irrigation. The price was 25 cents per acre down, with an
additional $1 per acre to be paid after reclamation.

"The chunk of it eyed by Haggin and Tevis was located close to
the Kern River, and was partially settled. A San Francisco
Chronicle story of 1877 describes what happened next: The
President's signature was not dry on the cunningly devised
enactment before Boss Carr [Haggin and Tevis' agent in the valley]
and his confederates were advised from Washington that the breach
was open. It was Saturday, the 31st of March. The applications
were in readiness, sworn and subscribed by proxies... All that
Saturday night and the following Sunday, the clerks in the Land
Office were busy recording and filing the bundles of applications
dumped upon them by Boss Carr, although it was not until several
days after that the office was formally notified of the approval of
the Desert Land Act. Thus, by hiring scores of vagabonds to enter
phony claims for 640 acres, and then by transferring those claims
to themselves, Haggin and Tevis were able to acquire title to
approximately 150 square miles of valley land before anybody else
in California had even heard of the Desert Land Act. In the
process, they dislodged settlers who had not yet perfected their
titles under old laws and who were caught unawares by the new one.
The Chronicle called the whole maneuver an 'atrocious villainy' and
demanded return of the stolen lands. A federal investigation
followed, but Haggin and Tevis, as usual, emerged triumphant"
(Barnes, 1971, part 4).

Material natural resources

The timber land and water rights were also a vast store of
value that became vulnerable to being transferred to a few hands
under the General Mining Law of 1872 and the Timber and Stone Act
of 1878. Using the latter, lumbermen and quarry operators obtained
millions of acres at $2.50 the "dummy entryman" technique. Under
the former, large tracts of public land were obtained for

purposes that had nothing to do with mining or even settlement
(Barnes, 1971, part 5).

As stated by Hibbard (1924, p. 457), over 13.5 million acres
of timber land was alienated, amounting to four-fifths of the
forest domain, under the Timber and Stone Act. The prices paid
were below the market value of the timber. Also, under the "Timber
Cutting Act vast areas of the forest regions were stripped of
valuable timber without any returns whatever" (p. 457).

The electro-magnetic spectrum

The Radio Act of 1927 established the Federal Radio
Commission, followed by the Communications Act of 1934 and the
establishment of the Federal Communications Commission (FCC) ("The
FCC," 1997), which regulates the non-federal electro-magnetic
spectrum. In 1996, sections of the spectrum were sold by the FCC
at auction. Previously, however, some $100 billion of spectrum was
given to American broadcast companies (Karrigan, 1995). The
government doubled the amount of spectrum each broadcaster
controlled. Originally intended for High Definition Television,
the space is now available for other uses such as paging and
cellular telephones. Thus, land-rent seeking and taking continues
in new forms.

Rent Seeking via Capitalization

Adam Smith (1976 [1776], Book I, p. 275) noted that "Every
improvement in the circumstances of society tends either directly
or indirectly to raise the real rent of land, to increase the
wealth of the landlord." The rental value of land is increased by
externalities that add to the demand to be located at some site.
As noted by Jasinowski (1973, p. 10), when subsidies are tied to
territory, the price of land rises by the present value of the
future stream of benefits that come with the ownership of land.
Once granted, capitalized expectations become a powerful political
force in resisting any reduction in the subsidy, since that
decreases the value of the land.

An example, Boxley and Anderson (1973, pp. 88-9) report on
research findings that farms sold with tobacco allotments were
enhanced by $300-600 per acre in 1945 and $1673-2500 in 1957.
Comparable values have been found for peanuts (p. 90). The subsidy
to sugar production, which is protected from competition by quotas
and a tariff, has also been found to become capitalized in higher
land values, has raised the value of sugar-beet farms (Ballinger,
1973). That landowners rather than farm workers have benefited
from the subsidies is shown by the increase of the labor-price of
a farm from 6 years' wages to 17 years' wages from 1954 to 1987
(Gaffney, 1993, p. 120).

The capitalization of urban government services has been
tested by several studies. Among them, Oates (1969) concluded that
services and property taxes were indeed capitalized. Sonstelie and
Portney (1980), using gross rentals and amount of tax rather than
tax rates, found empirical evidence for the capitalization of
community services, including public safety, fire protection,
streets, reduction of pollution, and education. Stern and Ayres
(1973, p. 131) conclude that transportation outlays are typically
"more than fully reflected in increased rents and land values."

The provision of such services and subsidies from taxes on
wage income and capital returns are thus a transfer of wealth to
the owners of the real estate whose value is capitalized.

The problem in land transfers

Transfer seeking is deplored both because it forcibly
reallocates resources, because of the social waste or loss of
resources, and because of the inequality of granting privileges to
concentrated special interests. In the case of the historic land
transfers, resources were not extracted from producers, but taken
from the natural endowment. Hence, while one could deplore the
corruption and unequal allocation, some might argue that there was
no damage to future generations, there was no excess burden in
simply allocating land, and it does not matter from a social
viewpoint who now has title to the land.

However, the massive land-rent seeking has had lasting
negative effects. First, there was the opportunity cost of the
transfers. If a country has some collective endowment of wealth,
then this provides an opportunity for perpetual income that can
substitute for taxation that imposes an excess burden. Secondly,
the allocation of land to a privileged few denied the population of
the United States an equal opportunity to use its natural resources
and created lasting inequalities in wealth. In agriculture, for
example, the four percent of the private landowners with the
largest holdings own 47 percent of the land (Wunderlich, 1993, p.
5). As noted by Paul Gates (1924, p. xii), "Within a generation or
two, forces governing prices sent land values to hundreds of
dollars per acre and produced the rapid emergence of tenancy.
Giving land away did not assure permanent family farm ownership."

The land policy of the U.S. government has also had the effect
of burdening workers with high taxes on their wages and on their
financial investments, and hampering the growth of wealth and
industry, having foregone the opportunity to fund the government
instead from the rent that would have been generated from the lands
that were given away.

The effects of land-rent seeking in the U.S. even extend to
economic science, as the authorities governing universities funded
by gains from rent seeking might select compatible faculty and thus
viewpoints. Neoclassical economics may have thus been influenced
by land-rent seeking. A key institution was Cornell University,
named for Ezra Cornell, founder of Western Union. Both Ezra
Cornell and the Cornell University held massive amounts of western
land. The Morrill (Agricultural) Act of 1862 had given land script
to the states in proportion to their populations, giving New York
a large share. Ezra Cornell obtained over a half million acres of
timber land with New York Agricultural College script at less than
market prices (Gates, 1943). Cornell donated $500,000 to found the
college (Gaffney, 1994, p. 74).

Alvin S. Johnson of Columbia University, a student of J.B.
Clark, was hired by Cornell University. Johnson (1902) was
instrumental in putting forth a new meaning of "rent" as a return
to land to any surplus over opportunity cost. The blending of
returns to land and capital (real and financial) was part of the
neoclassical turn, as much as marginal utility analysis. At the
time, the towns and counties of Wisconsin were attempting to tax
the land holdings of the Cornells, and this was successfully
resisted by the owners. Mason Gaffney (1994, p. 75) writes that
the administrators of Cornell University would have most likely
"hired someone to defend their position as absentee land
speculators." Besides shifting the very meaning of rent, Johnson
explicitly rejected the case for obtaining public revenue from land
rent in his 1914 article in the Atlantic Monthly, "The Case against
the Single Tax." Johnson was a mentor of Frank Knight at Cornell
and through Knight influenced the Chicago School (Gaffney, 1994).
Johnson's implicit defense of land-rent seeking thus coincides with
his theoretical obfuscation of the concept of land rent, which then
permeated neoclassical economics. Herein may lie some clues as to
how massive transfers of land and its rent have taken place and
continue with little knowledge or concern by economists as well as
by the public.

The U.S. government had the same attitude to the land as did
the government of the former Soviet Union. In Marxist ideology,
all value derives from labor, hence land has no value. The
government of the Soviet Union thus did not take into account the
rental value of land, and vast amounts of land were wasted by
pollution and the exhaustion of fertility. The U.S. government
considered the land to be a free resource and thus gave it away
rather than taking the cost into account, including the literal
accounting in the national budget of the loss of land value and
rent. Land sale proceeds were counted as revenue without counting
also the loss of value of a national asset.

The alternative policy, the lost opportunity, would have been
for the U.S. government to transfer land only to settlers for
actual use, with no grants to railroads, colleges, and the States
(and with proper compensation to the American Indians). Moreover,
a transfer of perpetual and transferable leaseholds would have
generated perpetual rental income to the federal and State
governments with little excess burden. The rental income would
then have substituted for the taxation of income, sales, and
buildings. Such a policy would have provided both greater equality
of opportunity (and outcomes) and a greater growth of wealth, and
also avoided the power of government over the financial affairs of
households and enterprises. Thus the historic opportunity costs of
the land transfers were immense and profound.

Constitution, Democracy, and Market Failure

Critics of markets who concede its efficiency often state that
markets fail to distribute income justly. Aside from the fact that
the market process in the U.S.A. as in all other countries has been
skewed and distorted by intervention, the outcomes of an economy
depend on the initial distribution of resources, which comes down
to the ownership of those resources not produced by the market
itself: land, including all natural resources. With the
distribution of land in the U.S. largely set by the transfer
seeking of the political process, a substantial part of the
inequality seen the U.S. today derives from the land transfers as
well as other non-market factors such as slavery. Such inequality
has thus been a political rather than a market failure.

To have avoided the whole land transfer business would have
required two basic structural changes in government. First, there
would have had to be an explicit constitutional philosophy and
policy regarding land tenure. Had the Constitution required either
that land be sold only for use at market prices, or had it made the
possession of land conditional on the payment of rent for public
and community revenue rather than authorizing taxation, the process
of transferring land would have equalized the benefits of the land
endowment rather than channel rents and privileges to politically
well-connected powerful interests. The use of the land rent for
civic services would also have preserved decentralization and
facilitated the privatization of community services, the rent paid
to private developers and civic associations (Foldvary, 1994),
since rent is more feasibly collected locally than are taxes on
productive processes.

Secondly, the prevention of transfer seeking and its
associated corruption requires fundamental reforms in the voting
process. Constitutional restraints on policy and the funding of
candidates are insufficient. Large-group democracy creates a
structure with incentives for transfer seeking that are too strong
to contain by limits on funding and activities. The public cannot
and will not act to monitor and prevent the transfers, as shown by
the history of the U.S. since its founding.

The fundamental governance reform that would prevent such rent
seeking is a restructuring of voting to small-group democracy, with
all voting taking place only in small groups or communities
(Foldvary, 1996). Such a communitarian democracy would be based on
the local neighborhood with a size small enough so that 1) the
candidates would be personally known by the voters, 2) there would
be little cost or effort for a person to become a representative,
and 3) media campaigns would be redundant, hence funding
superfluous.

Local neighborhoods of some 500 persons (150 voters) would
elect councils, the members recallable at any time. These councils
in turn elect higher-level councils representing blocks of 12-20
neighborhood councils. The process would continue to ever higher
level councils up to the city, State, and federal governments. At
each level, representatives would be drawn from the lower-level
councils and would be recallable at any time.

This would leave powerful interests with little leverage in
obtaining transfers and privileges. The demand for funds for media
campaigns would be much reduced, if not eliminated. This bottom-up
multi-level structure would provide incentives for both voting and
monitoring, since for each level a small group elects its
representatives and can recall them when dissatisfied. If
corruption took place at the top, the level below could quickly
change the policy or recall the officials; if not, then the next
lower levels would be able to recall those representatives, and so
on down to voters at the bottom.

We have seen the same type of massive privatization transfers
to the politically powerful interests in the de-socialized newly
democratic countries of Eastern Europe as took place in the United
States with the land. Similar political structure induce similar
outcomes. This paper has shown that the transfer process in the
U.S. was massive, corrupt, and fraudulent in the 19th century, the
vehicle then being land rather than tax funds. The analysis here
has argued that these transfers resulted from two Constitutional
failures: the failure to articulate a market-based land policy, and
the failure to structure democracy so as to avoid the dysfunctional
impotence and rational ignorance of the public.

Note

1. I concur with Leland Yeager's (1995, p. 386) suggestion that
"rent seeking" has been "a misleading term from the start" and that
"we would do well to ... speak of efforts to enlist government for
one's own special purposes as transfer-seeking."

References

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James M. Buchanan, Charles K. Rowley, and Robert D. Tollison, eds. New York: Basil Blackwell, pp. 9-46.

Ballinger, Roy A. 1973. "The Benefits and Burdens of the United States Sugar Quota System." In Government Spending and Land Values. Ed. C. Lowell Harriss. Madison: University of Wisconsin Press: 105-113.

Boxley, Robert F., and William D. Anderson. 1973. "The Incidence of Benefits from Commodity Price-Support Programs: a Case Study of Tobacco." In Government Spending and Land Values. Ed. C. Lowell Harriss. Madison: University of Wisconsin Press: 79-103.

Livermore, Shaw. 1939. Early American Land Companies. London: Oxford University Press.

McDonald, Forrest. 1958. We the People: The Economic Origins of the Constitution. Rpt. Chicago: University of Chicago

Oates, Wallace E. 1969. "The Effects of Property Taxes and Public Spending on Property Values: An Empirical Study of Tax Capitalization and the Tiebout Hypothesis." Journal of Political Economy 77 (Nov./Dec.): 957-71.

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